What are Ethereum ETFs? A Comprehensive Guide
Investors seeking regulated ways to invest in digital assets like Bitcoin and Ethereum without holding them directly have fueled the excitement around crypto ETFs. There are now over 40 such products globally, which manage over $6 billion of assets, indicating a potential for significant growth in this market segment. This segment is projected to contribute to global ETF Assets, reaching an estimated $18 trillion by 2026, offering a promising investment opportunity.
The recent landmark approval of spot Ethereum ETFs by the US Securities and Exchange Commission has sparked significant interest in these funds. This regulatory green light not only underscores the growing mainstream acceptance of cryptocurrencies but also paves the way for a new era of investment strategies, making Ethereum ETFs an enticing addition to investors' portfolios.
This guide will offer a comprehensive deep dive into Ethereum ETFs—their operations, history, advantages, current landscape, benefits, risks, and future outlook. We will cover recent regulatory developments that have paved the way for Ethereum ETFs and delve into the specifics of the major Ethereum ETF products.
Ethereum Ecosystem Overview
In the expansive guide to Ethereum ETFs, understanding the underlying Ethereum ecosystem is crucial due to its impact on the growth and appeal of these ETFs. As of 2024, Ethereum continues dominating the DeFi and NFT sectors, driving substantial interest in blockchain technology.
With Ethereum serving as the backbone of 70% of DeFi transactions and boasting a Total Value Locked (TVL) of $ 60 billion in DeFi platforms, its influence in the sector is undeniable. Moreover, the Ethereum network has experienced a staggering 300% surge in NFT trading volume, surpassing $10 billion in sales, further solidifying its position in the rapidly expanding NFT market.
Successfully migrating to Ethereum 2.0, ushering in a more scalable and energy-efficient Proof of Stake (PoS) framework, has significantly improved the network's functionality. This upgrade has further fueled investor interest, marked by the stake of $30 billion worth of Ethereum, showcasing confidence in the network's future.
Institutional engagement with Ethereum has surged, driven by its expanded utility and active developer community, which now exceeds 500,000 contributors and continually refines and extends its capabilities.
This robust and dynamic ecosystem bolsters direct investment in Ethereum and solidifies the appeal and projected success of Ethereum ETFs.
Volume traded and TVL on Ethereum in the past six months. Source: DeFiLlama.
What Are Ethereum ETFs?
An Ethereum ETF (Exchange-Traded Fund) is a financial product that allows investors to gain exposure to the price movements of ether (ETH), the second-largest cryptocurrency by market capitalization. Unlike directly purchasing and holding ETH, investors can access Ethereum through ETFs traded on stock exchanges. These funds mirror the performance of Ethereum without requiring investors to manage the digital assets themselves.
Why Ethereum ETFs Matter
Market Access and Convenience
Easy Access: Ethereum ETFs offer a simplified entry point into the cryptocurrency market for traditional investors. By trading like regular stocks, these ETFs provide a familiar and easily accessible investment method, broadening Ethereum's investor base and contributing to its market growth.
Regulatory Approval: The U.S. SEC's endorsement of Ethereum ETFs boosts confidence in Ethereum and gives investors a sense of security. This approval paves the way for broader investor access, enhanced liquidity, market maturity, and greater integration into the traditional financial ecosystem, reassuring investors about the legitimacy of these investment products.
Reduced Complexity
No Direct Ownership: Ethereum ETFs eliminate the need for direct cryptocurrency management, bypassing the complexities of digital wallets, private keys, and secure storage.
Futures-Based Structure: Many Ethereum ETFs use futures contracts, letting investors speculate on Ethereum’s future prices without owning the actual asset. This structure reduces exposure to the asset's volatility and simplifies the investment process.
Ethereum’s Expanding Utility
Ethereum extends beyond a mere cryptocurrency; it supports major innovations in decentralized finance (DeFi), non-fungible tokens (NFTs), and smart contracts. Ethereum ETFs provide a gateway to investing in these broad applications, tapping into Ethereum's role as a decentralized platform reshaping various sectors.
Institutional Engagement
Ethereum's flexibility and comprehensive application scope attract significant institutional interest, positioning it as a strategic investment and highlighting the importance of Ethereum ETFs.
Regulatory Certainty and Clarity
The approval of Ethereum ETFs brings regulatory clarity, enhancing market certainty and investor confidence. This clarity legitimizes the cryptocurrency market, fostering wider adoption and investment in the sector.
How Ethereum ETFs Work
Ethereum ETFs work similarly to other ETFs - they are traded on stock exchanges and can be bought and sold like regular stocks. The ETF issuer purchases a large amount of Ethereum and stores it securely. They then issue shares of the ETF that represent fractional ownership interests in the underlying Ethereum.
When investors buy shares of an Ethereum ETF, they effectively own a portion of the Ethereum held by the ETF. The share price fluctuates with the price changes of Ethereum, though it may not perfectly mirror the cryptocurrency due to fees or other fund-related discrepancies.
Ethereum ETFs function by directly holding Ethereum or using derivatives and other financial instruments to replicate its price movements. Here are the two primary types of Ethereum ETFs:
Physically Backed ETFs
They function similarly to giant digital wallets, directly holding Ethereum tokens (ETH). This ensures that their value reflects the real-time price of Ethereum and thus offers investors direct exposure to the cryptocurrency's price fluctuations.
Advantages:
Direct price correlation to spot ETH price.
Hold real ETH, not derivatives.
Lower counterparty risk.
Disadvantages:
High custody and insurance fees.
Tracking error risks.
Premiums/discounts on share price.
Ethereum Futures ETFs
On the other hand, Ethereum Futures ETFs diverge from this direct holding model. Instead of owning the actual cryptocurrency, these ETFs leverage futures contracts to emulate Ethereum's market performance. These ETFs are already available for trading and provide an alternative way to gain exposure to Ethereum without holding the digital asset directly.
Advantages:
More accessible for mainstream investors.
Lower fees than physical ETFs.
Easier to implement and launch.
Disadvantages:
Susceptible to contango, increasing tracking error.
No direct holdings of ETH.
Higher counterparty risks.
Ethereum Vs. Bitcoin ETFs
Both ETFs offer a convenient and regulated way to invest in cryptocurrencies, but due to the distinct nature of their underlying assets, they cater to different investment strategies. This section compares Ethereum and Bitcoin ETFs, highlighting their key differences to help investors make informed decisions.
Recent ETF Developments and Approvals
The landscape of cryptocurrency investment took a historic turn in May 2024 with the U.S. Securities and Exchange Commission (SEC)'s approval of spot Ethereum Exchange-Traded Funds (ETFs) in the United States. This significant development will allow investors to gain exposure to the price of Ethereum through regulated security, bypassing the necessity to purchase and hold the cryptocurrency directly.
Although these approvals constitute a significant achievement, they are not the final. These ETFs will not be available for trading until the final regulatory steps are carried out. Read on for more details.
The SEC’s decision to approve these Ethereum ETFs followed the submissions from major exchanges, including Nasdaq, NYSE, and CBOE. These institutions had been awaiting the green light on their applications to list and trade ETFs tied directly to the price of Ethereum, highlighting a potential new era for institutional and retail investment in cryptocurrency.
Understanding the Ethereum ETF Approval Process
Launching a spot Ethereum ETF involves approval from the SEC on two filings:
19b-4 Forms Filings
In a surprising turn of events, the U.S. Securities and Exchange Commission (SEC) has approved eight applications for spot Ethereum exchange-traded funds (ETFs).
These approvals are based on the 19b-4 forms, which are submissions made to the SEC seeking approval to list and trade these new ETFs. National securities exchanges (such as NYSE or Nasdaq) submit these forms to seek the SEC’s approval to introduce new products or amend existing rules. It is the first step in the regulatory process.
The SEC scrutinizes these filings to ensure alignment with regulatory standards and market stability. Approval of the 19b-4 filings is crucial for Ethereum ETFs to be listed and traded. After the 19-4 filings gain approval, other steps, such as reviewing the S-1 forms, are completed.
S-1 Registration Forms
The SEC has initiated discussions with potential issuers regarding their S-1 registration statements for Ethereum ETFs.
The S-1 filings must also gain approval alongside the 19b-4 approval. These filings offer detailed information and comprehensive documents about new securities offered/introduced to the public.
The form includes information like the fund’s structure, management, and investment strategy for ETFs, particularly how it plans to replicate Ethereum’s performance.
Approval of S-1 forms is mandatory for ETFs to be marketed and sold. The SEC uses this information to analyze the potential risks associated with the ETF and ensure investor transparency.
Exchange Listing Approval for Ethereum Spot ETFs
On May 23rd, 2024, the SEC approved Nasdaq, CBOE, and NYSE applications to list Ethereum (ETH) exchange-traded funds (ETFs), opening the possibility for these products to start trading later this year.
Before this approval, only Ethereum futures ETFs were allowed to trade in the United States.
Approved Exchanges and ETFs
The approval encompasses several ETFs distributed across leading exchange platforms. The full details of the approved ETFs are provided below:
VanEck Ethereum Trust: Approved for CBOE, VanEck's ETF will track Ethereum with actual Ether custody.
BlackRock iShares Ethereum Trust (ETHA): This ETF, issued by the world's largest asset manager, BlackRock, is approved for NASDAQ and offers Ethereum exposure.
Fidelity Ethereum ETF: Approved for NYSE Arca, Fidelity's ETF will reflect Ether's price for regulated market participation.
Grayscale Ethereum ETF: Approved for NYSE Arca, Grayscale transitions from trusts to an ETF, broadening access to Ethereum investment.
Franklin Templeton Ethereum ETF: Approved for CBOE, focusing on direct Ether exposure, prioritizing low fees and liquidity.
ARK 21Shares Ethereum ETF: Approved for NASDAQ, a joint venture ETF combining ARK Invest's and 21Shares’ expertise in disruptive innovation and crypto.
Invesco Galaxy Ethereum ETF: This ETF, approved for CBOE and issued by Invesco and Galaxy Digital, will provide secure Ethereum market engagement.
Bitwise Ethereum ETF: Approved for NYSE Arca, Bitwise's ETF is designed to simplify Ethereum investment for a broad audience.
Pending Final Approval
Gaining initial SEC approval is an essential first step for Ethereum ETF issuers, leading to an extensive final approval process. This phase ensures each ETF meets regulatory standards, offers adequate investor protection, and contributes to market stability through detailed reviews, including legal scrutiny and due diligence.
The timeline until final approval can vary greatly, from weeks to months, depending on the application's complexity and the need for further clarifications, making the wait time unpredictable. Additionally, final approval isn't guaranteed for all ETFs, as each is evaluated on its structure, risk management practices, and investor safeguards, with some requiring adjustments to comply with regulatory standards.
Current Landscape of Ethereum ETFs
While Ethereum ETFs are largely unavailable in the US, except for some future ETFs, other regions have witnessed the availability of Ethereum ETFs, providing investors with an efficient method to gain exposure to Ethereum. Here are some notable Ethereum ETFs currently available, highlighting their key metrics and features:
CI Galaxy Ethereum ETF (ETHX): Launched April 16, 2021, on TSX with a 0.40% management fee and AUM of $910 million as of May 2024. Uses cold storage, trades in CAD and USD, and is RRSP/TFSA compatible.
Purpose Ether ETF (ETHH): Started on TSX April 19, 2021, with a 1.00% management fee and $324 million AUM by May 2024. Also uses 100% cold storage, available in CAD and USD, RRSP/TFSA eligible.
ProShares Ether Strategy ETF (EETH): It was launched on October 2, 2023, and uses Ethereum futures contracts. As of May 24, 2024, it had an AUM of $93.30 million, an expense ratio of 0.95%, and a NAV of $81.13.
VanEck Ethereum Strategy ETF (EFUT): Launched October 2, 2023, tracks Ethereum via futures. Reports a NAV of $29.001, YTD return of 44.36%, AUM of $33.36 million, and a 0.66% expense ratio as of May 22, 2024.
Evolve Ether ETF (ETHR): Launched April 19, 2021, on TSX, symbol ETHR, features a 0.75% management fee and $86 million AUM as of May 2024. It offers 100% cold storage, trades in CAD and USD, and is RRSP/TFSA compatible, providing a balanced choice with moderate fees and robust security.
Purpose Ether ETF (ETHH) Fund details. Source: Purpose Investments.
Adoption of Ethereum ETFs
The adoption of Ethereum ETFs has grown rapidly over the past year. According to this analysis, the price of Ethereum surged 24% in May 2024 to over $3700, indicating strong demand from investors. As Ethereum's usage and value have increased, so has interest in ETFs that track its price.
In 2023, the total assets under management (AUM) for Ethereum ETFs grew from just $15 million to over $120 million by the end of the year. Research suggests this growth will accelerate in 2024, with AUM potentially reaching $1 billion. The launch of several new Ethereum ETF products this year has provided more exposure options for investors.
Looking ahead, many analysts forecast massive growth for Ethereum ETFs. As more institutional investors seek exposure to digital assets, ETFs present a convenient and familiar way to invest in the space. If Ethereum maintains its momentum and continues gaining mainstream adoption, its ETFs could rival some of the largest commodity ETFs in just a few years. The ease of investing offered by the ETF structure should drive rapid asset increases under management.
How to Choose the Right Ethereum ETF
When selecting an Ethereum ETF, it's essential to understand the critical differences between available options. The main factors to evaluate are:
Futures-Based vs. Spot ETFs
For Futures-Based Ethereum ETFs, the most notable challenge is tracking errors. Since these ETFs don't hold Ethereum directly, the price of the ETF might not always match the spot price due to factors like the need to roll futures contracts. Additionally, futures markets can sometimes enter into conditions known as contango or backwardation, resulting in the ETF underperforming the spot market over time. On the upside, these ETFs often come with clearer regulatory approval, offering a certain level of convenience and, potentially, a chance to leverage gains.
Spot Ethereum ETFs, however, offer direct exposure to the price of Ethereum as they hold the actual cryptocurrency. This mechanism typically results in a lower tracking error, with the ETF prices more closely mirroring that of Ethereum itself. However, the custody of the actual asset introduces risks related to security and potential regulatory flux, which could affect the ETF's stability and availability.
Expense Ratio and Liquidity
The expense ratio is the annual fee for holding ETF shares, shown as a percentage of your investment. An expense ratio of 0.50% to 1% means you pay 50 cents to $1 annually per $100 invested. These fees cover management, administration, and marketing costs. Opting for ETFs with lower expense ratios can save money and enhance investment returns.
Liquidity in ETFs describes how easily shares can be traded. ETFs with high liquidity have more daily transactions, resulting in narrower bid-ask spreads (the difference between buying and selling prices), which allows for transactions closer to the market price with minimal costs. High liquidity is essential for quickly entering or exiting positions and large trades that could otherwise move the market.
Tax and Regulatory Considerations
Selling ETF shares for a profit incurs taxes. Profits from investments under a year attract short-term capital gains taxes at your ordinary income rate. Meanwhile, profits from investments over a year are taxed at reduced long-term capital gains rates, offering potential tax savings.
Additionally, an ETF's regulatory compliance, particularly with the Securities and Exchange Commission (SEC), affects its performance and reliability. SEC-approved ETFs meet stringent standards, providing investor confidence. Yet, changing regulatory conditions could influence ETF operations and pricing. Staying informed on tax obligations and regulatory changes is critical to savvy ETF investment decisions.
Conclusion
Ethereum ETFs represent an exciting new frontier in cryptocurrency investing. As highlighted throughout this deep dive, they provide a regulated and convenient way to gain exposure to Ether's growth potential within a traditional investment vehicle.
Approving several Ethereum ETFs in 2024 was a landmark moment, validating Ethereum as a mature digital asset. While adoption is still in its early stages, we can expect Ethereum ETFs to continue gaining traction as investors seek simplified access to the second-largest cryptocurrency.
As more issuers introduce additional Ethereum ETF products, competition should improve available offerings. Over time, expect to see tighter spreads, lower expense ratios, and enhanced liquidity. Product innovation will refine ETF wrappers as innovation continues to shape Ethereum.
For now, Ethereum ETFs represent the most accessible path yet for traditional investors to participate in the growth of decentralized networks. While risks remain, the potential rewards may prove worth the calculated gamble. As always, adhere to sound portfolio allocation principles and perform due diligence before investing.
Disclaimer: This guide is for informational purposes only and does not constitute financial advice, investment recommendations, or an endorsement of any specific investment strategy. Before making any investment decision, performing independent research and consulting a qualified financial professional is crucial. We accept no liability for any loss or damage arising from its use.